UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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12
ORRSTOWN FINANCIAL SERVICES, INC.
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(Name of Registrant as Specified In Its Charter)
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[Orrstown Financial Services, Inc. Logo]
Orrstown Financial Service, Inc.
77 East King Street
Shippensburg, PA 17257
April 2, 2004
Dear Shareholder,
You are invited to attend the 2004 Annual Meeting of Shareholders of
Orrstown Financial Services, Inc. to be held on Tuesday, May 4, 2004 beginning
at 9:00 a.m. The meeting will be held in the King Street Conference Room of the
Orrstown Bank Administrative Center located at 77 East King Street,
Shippensburg, Pennsylvania.
A Notice of the Annual Meeting, Proxy Statement and Proxy are enclosed with
this mailing. You are encouraged to review this material and complete, sign,
date and return the Proxy in the postage-paid envelope provided. It is
important for you to return the Proxy regardless of whether you plan to attend
the Annual Meeting. I also invite you to review the enclosed Annual Report,
which includes details of the success achieved by your company during 2003.
Sincerely,
Kenneth R. Shoemaker
President and Chief Executive Officer
[Orrstown Financial Services, Inc. Logo]
Orrstown Financial Services, Inc.
77 East King Street
Shippensburg, Pennsylvania 17257
April 2, 2004
Notice of Annual Meeting of Shareholders
The Annual Meeting of Shareholders of Orrstown Financial Services, Inc.
will be held on Tuesday, May 4, 2004, at 9:00 a.m., in the King Street
Conference Room of the Orrstown Bank Administrative Center located at 77 East
King Street, Shippensburg, Pennsylvania, to consider and take action on the
following matters:
1. Elect three directors to Class B for three year terms expiring
in 2007;
2. Approve an amendment to the Articles of Incorporation to
increase the number of authorized shares of the Company's common
stock from 10 million shares to 50 million shares; and
3. Transact such other business as may properly come before the
meeting.
Your Board of Directors recommends a vote "FOR" the election as directors
to Class B of the three nominees listed in the enclosed Proxy Statement and a
vote "FOR" the proposed amendment to the Articles of Incorporation to increase
the number of authorized shares of common stock from 10 million shares to 50
million shares.
This Notice of Annual Meeting of Shareholders, the Proxy Statement and the
enclosed Proxy card are being sent to shareholders of record at the close of
business on March 25, 2004.
Denver L. Tuckey
Secretary
TABLE OF CONTENTS Page
Annual Meeting Information 1
Who is entitled to vote? 1
On what am I voting? 1
How does the Board of Directors recommend I vote
on the proposals? 2
How do I vote? 2
What is a quorum? 2
What vote is required to approve each proposal? 2
Who will count the vote? 3
What is the deadline for shareholder proposals for next
year's Annual Meeting? 3
How are proxies being solicited? 3
Share Ownership of Certain Beneficial Owners 3
Share Ownership of Management 4
Section 16(a) Beneficial Ownership Reporting Compliance 5
Item 1- Election of Directors 5
Biographical Summaries of Nominees and Directors 6
Executive Officers 8
Board Committees and Meeting Attendance 8
Audit Committee Report 10
Compensation of Directors 11
Report on Executive Compensation 12
Company Performance 14
Executive Compensation 16
Summary of Compensation 16
Option Grants in 2003 17
Aggregated Option Exercises in 2003
and Year-end Option Values 18
Retirement Benefits 18
Change in Control Agreement 19
Transactions with Management 20
Independent Certified Public Accountants 20
Shareholder Communications with the Board of Directors 21
Item 2 - Approve Amendment to Articles of Incorporation 21
Proposed Amendment 21
Reasons for the Proposed Increase in Common Shares 22
Effective Date 23
Vote Required 23
Board Recommendation 23
ORRSTOWN FINANCIAL SERVICES, INC.
77 East King Street
Shippensburg, Pennsylvania 17257
PROXY STATEMENT
Annual Meeting Information
This proxy statement contains information about the Annual Meeting of
Shareholders of Orrstown Financial Services, Inc. to be held Tuesday, May 4,
2004, beginning at 9:00 a.m., in the King Street Conference Room of the Orrstown
Bank Administrative Center located at 77 East King Street, Shippensburg,
Pennsylvania, and at any adjournments or postponements of the meeting. The
proxy statement was prepared at the direction of the Company's Board of
Directors to solicit your proxy for use at the Annual Meeting. It will be
mailed to shareholders on or about April 2, 2004.
Who is entitled to vote?
Shareholders owning Company common stock on March 25, 2004 are entitled to
vote at the Annual Meeting or any adjournment or postponement of the meeting.
Each shareholder has one vote per share on all matters to be voted on. On March
1, 2004 there were 5,097,249 shares of Common Stock outstanding.
On what am I voting?
You will be asked to:
1. Elect 3 directors to Class B for three year terms expiring in 2007; and
2. Approve an amendment to the Articles of Incorporation to increase the
number of authorized shares of common stock from 10 million shares to
50 million shares.
The Board of Directors is not aware of any other matters to be presented for
action at the meeting. If any other matter requiring a vote of the shareholders
would be presented at the meeting, the proxies will vote according to the
directions of Company management.
How does the Board of Directors recommend I vote on the proposals?
The Board of Directors recommends:
1. A vote FOR the election of each of the three nominees as directors to
Class B; and
2. A vote FOR approval of the amendment to the Articles of Incorporation
to increase the number of authorized shares of common stock from 10
million shares to 50 million shares.
How do I vote?
Sign and date each proxy form you receive and return it in the postage-paid
envelope provided. If you sign your proxy form but do not mark your choices,
your proxies will vote for:
* the three persons nominated for election as directors to Class B; and
* approval of the amendment to the Articles of Incorporation to
increase the number of authorized shares of common stock from 10
million shares to 50 million shares.
You may revoke your proxy at any time before it is exercised. To do so,
you must give written notice of revocation to the Secretary, Orrstown Financial
Services, Inc., 77 East King Street, Shippensburg, Pennsylvania 17257, submit
another properly signed proxy with a more recent date, or vote in person at the
meeting.
What is a quorum?
A "quorum" is the presence at the meeting, in person or by proxy, of the
holders of a majority of the outstanding shares. There must be a quorum for the
meeting to be held. Abstentions are counted for purposes of determining the
presence or absence of a quorum, but are not considered a vote cast under
Pennsylvania law. Brokers holding shares in street name for their customers
generally are not entitled to vote on certain matters unless they receive voting
instructions from their customers. Such shares for which brokers have not
received voting instructions from their customers are called "broker non-votes."
Under Pennsylvania law broker non-votes will be counted to determine if a quorum
is present with respect to any matter to be voted upon by shareholders at the
meeting only if such shares have been voted at the meeting on another matter
other than a procedural motion.
What vote is required to approve each proposal?
In the election of directors, the three nominees for election as directors
to Class B receiving the highest number of votes will be elected to the Board of
Directors.
The affirmative vote a majority of the votes cast is required to approve
the amendment to the Articles of Incorporation to increase the number of
authorized shares of common stock from 10 million shares to 50 million shares.
Who will count the vote?
The Judges of Election appointed by the Board of Directors will count the
votes cast in person or by proxy at the Annual Meeting.
What is the deadline for shareholder proposals for next year's Annual Meeting?
Shareholders may submit proposals on matters appropriate for shareholder
action at future annual meetings by following the rules of the Securities and
Exchange Commission and the Company's By-laws. Proposals intended for inclusion
in next year's proxy statement and proxy card must be received by the Company
not later than November 30, 2004. All proposals should be addressed to the
Secretary of the Company.
How are proxies being solicited?
In addition to solicitation by mail, the officers, directors and employees
of the Company may, without additional compensation, solicit proxies by
telephone or personal interview. Brokers and other custodians, nominees and
fiduciaries will be requested to forward soliciting material to the beneficial
owners of Common Stock held by such persons and will be reimbursed by the
Company for their expenses. The cost of soliciting proxies for the Annual
Meeting will be born by the Company.
Share Ownership of Certain Beneficial Owners
The Company does not know of any person who beneficially owned more than 5%
of the Company's Common Stock on March 1, 2003, except as shown in the following
table:
Name and address of Common Stock Percent of
Beneficial Owner Beneficially Owned Class
Orrstown Bank 799,437 (1) 15.68%
77 East King Street
Shippensburg, PA 17257
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(1) Shares held directly by the Bank, or by way of its nominees,
in its trust department as fiduciary for certain trusts, estates
and agency accounts that beneficially own the shares. The Bank
shares voting power as to 419,327 of these shares but, as a
matter of policy, votes such shares solely in accordance with the
directions, if any, of the persons with whom it shares voting
power. The Bank has sole voting power as to 138,991 of these
shares and, subject to the provisions of governing instruments
and/or in accordance with applicable provisions of fiduciary law,
may vote such shares in what it reasonably believes to be the
best interest of the respective trust, estate or agency account
for which it holds such shares. As a matter of policy, however,
the Bank does not vote shares for which it has sole voting power.
The Bank does not have the right to vote the remaining 241,119
shares and disclaims beneficial ownership of such shares.
Share Ownership of Management
The following table shows the number of shares of Company Common Stock
beneficially owned by each incumbent director, each nominee and each executive
officer named in the Summary Compensation Table appearing on page 15, and by all
of the incumbent directors, nominees and executive officers of the Company as a
group, as of March 1, 2004. Except as otherwise indicated, sole voting power
and sole investment power with respect to the shares shown in the table are held
either by the individual alone or by the individual together with his or her
spouse.
Name Common Stock
Beneficially Owned
(1)(2)
Anthony F. Ceddia 4,473
Jeffrey W. Coy 29,194
Jeffrey W. Embly 18,332
Bradley S. Everly 17,152
Philip E. Fague 22,183
Stephen C. Oldt 19,566
Andrea Pugh 19,217
Gregory Rosenberry 34,110
Kenneth R. 50,532
Shoemaker
Glenn W. Snoke 11,479
Common Stock
Name Beneficially Owned
(1)(2)
Denver L. Tuckey 10,612
John S. Ward 4,811
Joel R. Zullinger 27,071
Directors, 293,493
nominees
and
executiveofficers
as a group (17
persons
including those
named
above)
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(1) On March 1, 2004, none of the individuals named in the above table
beneficially owned more than 1% of the outstanding shares of Company Common
Stock. On that date, all of the incumbent directors, nominees, and
executive officers as a group beneficially owned approximately 5.63% of the
outstanding shares of Company Common Stock. Fractional shares beneficially
owned by such individuals have been rounded down to the number of whole
shares beneficially owned.
(2) The amounts shown include the following amounts of Common Stock that the
indicated individuals and group have the right to acquire within 60 days of
March 1, 2004 through the exercise of stock options granted pursuant to the
Company's stock option plans: Mr. Ceddia, 2,166; Mr. Coy, 2,706; Mr.
Embly, 12,610; Mr. Everly, 12,238; Mr. Fague, 15,044; Mr. Oldt, 5,624; Ms.
Pugh, 2,706; Mr. Rosenberry, 2,706; Mr. Shoemaker, 28,198; Mr. Snoke,
2,706; Mr. Tuckey, 2,706; Mr. Ward, 2,706; Mr. Zullinger, 2,706; and all
directors, nominees and executive officers as a group, 117,460 shares.
Section 16(a) Beneficial Ownership Reporting Compliance. Based on our
records, we believe that during 2003 our directors and executive officers
complied with all SEC filing requirements applicable to them.
ITEM 1 - ELECTION OF DIRECTORS
The By-laws of the Company provide that the directors will serve in three
classes, as nearly equal in number as possible, with each class of directors
serving a staggered, three year term of office. At each annual meeting of
shareholders, a class consisting of approximately one third of all of the
Company's directors is elected to hold office for a term expiring at the annual
meeting held in the third year following the year of their election and until
their successors have been elected. At the Annual Meeting the shareholders will
be asked to elect three directors to Class B to serve until the annual meeting
of shareholders in 2007 or until their successor is elected.
The Board of Directors has nominated the following persons for election as
directors to Class B:
Gregory A. Rosenberry
Glenn W. Snoke
Denver L. Tuckey
All of the nominees are presently serving as directors of the Company and of
Orrstown Bank, the wholly owned bank subsidiary of the Company.
Your shares of Company Common Stock represented by your proxy will be voted
FOR the election of the three named nominees unless you mark the proxy form to
withhold authority to vote for one or more of the nominees. If one or more of
the nominees is unable or unwilling to serve as a director, the persons named in
the proxy will vote for the election of such substitute nominee, if any, as will
be named by the Board of Directors. The Company has no reason to believe that
any of the nominees will be unable or unwilling to serve as a director. Each
nominee has expressed a willingness to serve if elected.
The Board of Directors recommends a vote FOR the election of all three
nominees as directors to Class B.
Biographical Summaries of Nominees and Directors
Information about the nominees for election as directors to Class B at the
Annual Meeting and information about the directors in Class A and Class C is set
forth below.
CLASS A DIRECTORS - TERM EXPIRES 2005
Principal occupation
for last 5 years and Director
Name Age position with the Since
Company
Jeffrey W. Coy 52 State Legislator; Vice 1984(1)
(2) Chairman of the Company
and the Bank
John S. Ward 66 President, Modern 1999
(3) Transit Partnership, a
non-profit organization
created to support
bringing commuter rail
to Central
Pennsylvania; retired
Chief Clerk, Cumberland
County, Pennsylvania
Joel R. 55 Attorney-at-Law; 1981(1)
Zullinger Chairman of the Board
(2) of the Company and the
Bank
CLASS B DIRECTORS - TERM EXPIRES 2007
Principal Occupation
for last 5 years and Director
Name Age position with the Since
Company
Gregory A. 49 President, Tri-Valley 1997
Rosenberry Forestry, Inc., a
timber harvesting and
wholesale business
Glenn W. Snoke 55 President, Snokes 1999
Excavating & Paving,
Inc.
Denver L. Tuckey 70 Retired businessman; 1995
(2)(3) Secretary of the
Company and the Bank
CLASS C DIRECTOR NOMINEES - TERM EXPIRES 2006
Principal occupation
for last 5 years and Director
Name Age position with the Since
Company
Anthony F. Ceddia 60 President, 1996
(3) Shippensburg
University
Andrea Pugh 51 Owner, PharmCare 1996
(3) Consultants, a
pharmacy consulting
business
Kenneth R. 56 President and Chief 1986(1)
Shoemaker Executive Officer of
(2) the Company and the
Bank
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(1) Includes service as director of Orrstown Bank during period prior to 1988,
when Orrstown Bank became a wholly-owned subsidiary of the Company.
(2) Member of the Executive Committee of the Bank.
(3) Member of the Audit Committee.
Executive Officers
In addition to Kenneth R. Shoemaker, President and Chief Executive
Officer of the Company and the Bank, who also serves on the Board of Directors
and whose biographical information is set forth above, the Executive
Officers of the Company and/or the Bank are:
Philip E. Fague - age 44; Executive Vice President and Assistant
Treasurer of the Company; and Executive Vice President and Chief Sales and
Service Officer of the Bank.
Stephen C. Oldt - age 61; Executive Vice President and Assistant
Secretary of the Company; and Executive Vice President and Chief Operations
Officer of the Bank.
Bradley S. Everly - age 52; Senior Vice President and Treasurer of the
Company; and Senior Vice President and Chief Financial Officer of the Bank.
Barbara E. Brobst - age 45; Vice President and Senior Trust Officer of the
Bank.
Stephen C. Caldwell - age 55; Vice President and Director of Human
Resources of the Bank.
Nathan A. Eifert - age 35; Vice President and Director of Marketing
of the Bank.
Jeffrey W. Embly - age 33; Vice President of the Company; and Vice
President and Senior Loan Officer of the Bank.
Benjamin S. Stoops - age 52; Vice President and Chief Technology
Officer of the Bank.
Board Committees and Meeting Attendance
During 2003 the Board of Directors of the Company met 13 times and the
Board of Directors of Orrstown Bank met 13 times. The Board of Directors of the
Company has an Executive Committee that did not hold any meetings in 2003, and
an Audit Committee. The Board of Directors of the Bank has an Executive
Committee. During 2003 all of the Directors of the Company and the Bank
attended at least 75% of all meetings of the respective Boards and Committees on
which they served. In addition, although the Company does not have a formal
policy regarding the attendance by Directors at the Annual Meeting of
Shareholders, it is generally expected that each Director will attend. All of
the Company's Directors attended the Annual Meeting of Shareholders in 2003.
Executive Committee. The Executive Committee of the Bank's Board of
Directors acts on matters between regular meetings of the Board of Directors.
The Executive Committee also makes recommendations regarding compensation to the
Board of Directors and reviews the qualifications of and makes recommendations
to the Board of Directors regarding potential candidates to be nominated for
election to the Board of Directors. Those candidates recommended by the
Executive Committee are then submitted to the Board of Directors for approval as
nominees. In making its recommendations, the Executive Committee determines the
appropriate qualifications, skills and characteristics desirable for the Board
of Directors in the context of the
strategic direction of the Company and the Bank. Although there are no stated
minimum criteria for nominees, the Executive Committee considers a variety of
factors including a candidate's integrity, independence, qualifications, skills,
experience, including experience in finance and banking, compatibility with
other members of the Board of Directors, and such other factors as it may deem
to be in the best interest of the Bank, the Company and its shareholders, which
factors may change from time to time. The Executive Committee will consider
candidates recommended by shareholders, other directors and other sources
including the community and the Bank's regional advisory boards. The Executive
Committee met 13 times during 2003. The members of the Executive Committee are
Jeffrey W. Coy, Chairman, Kenneth R. Shoemaker, Denver L. Tuckey and Joel R.
Zullinger. The same individuals also constitute the Executive Committee of the
Board of Directors of the Company. Although they hold offices of the Company
and the Bank, the Board of Directors has determined that Messrs. Coy, Tuckey and
Zullinger are independent as defined in the listing standards of the National
Association of Securities Dealers, Inc. (NASD) because they hold such offices in
their capacities as Directors and because they do not, except as Directors,
perform a policy making function, and are not otherwise in charge of a principal
business unit, division or function of the Company or the Bank. As President
and Chief Executive Officer of the Company and the Bank, Mr. Shoemaker is not
independent.
Audit Committee. The Audit Committee is responsible for providing
independent oversight and review of the Company's accounting functions and
financial reporting and internal control systems. The Audit Committee monitors
the preparation of quarterly and annual financial reports by Company management,
including reviewing with management and the Company's independent auditors the
scope and results of the annual audit and recommendations made by the
independent auditors and related management responses, and reviews prior to
filing all annual and quarterly reports and proxy statements filed with the
Securities and Exchange Commission (SEC). The Audit Committee also is
responsible for matters concerning the relationship between the Company and its
independent auditors including their appointment, compensation and retention;
approval of their audit and permissible non-audit services prior to engagement;
and determining whether the independent auditors are "independent." In
addition, the Audit Committee oversees management's implementation and reviews
the effectiveness of the Company's internal control systems including reviewing
policies relating to legal and regulatory compliance, ethics and conflicts of
interest; and reviewing the activities and recommendations of the Company's
internal auditing program.
The Board of Directors revised the Audit Committee Charter in 2003 in order
to bring it into conformity with requirements specified in the Sarbanes-Oxley
Act of 2002 and related SEC regulations. A copy of the Audit Committee Charter,
as revised, is included as Appendix A to this Proxy Statement.
The members of the Audit Committee are Andrea Pugh, Chair, Anthony F.
Ceddia, Denver L. Tuckey and John S. Ward, each of whom the Board of Directors
has determined to be independent as defined in NASD listing standards. The
Audit Committee Charter provides that the Audit Committee shall consist of at
least 3 directors, each of whom is to be "independent" as defined by applicable
law and regulation, and who also is free of any relationship that, in the
opinion of the Board, could interfere with the exercise of their independent
judgment. Consequently, Glenn W. Snoke, who served on the Audit Committee
through December, 2003, stepped down from
service on the Audit Committee in order that the services his business, Snokes
Excavating & Paving, Inc., performs from time to time on behalf of the Bank
would not appear to compromise independence on his part or that of the Audit
Committee as a whole.
The Audit Committee Charter also provides that at least one member of the
Audit Committee must have accounting or related financial management expertise
as the Board of Directors interprets such qualifications in its business
judgment. Although the Board of Directors believes that it is appropriate for
the Audit Committee to have at least one member with accounting or related
financial management expertise, it also believes that there are a number of
other important factors, discussed above with respect to the factors considered
by the Executive Committee in connection with candidates for nomination for
election to the Board of Directors that affect Board composition. In
accommodating each of these factors and composing a Board of Directors that is,
as a whole, strong in its collective knowledge of and diversity of skills and
experience with respect to the business of banking and the communities and
markets in which the Bank competes, together with demonstrated qualities
exhibiting leadership, vision and business judgment, it is possible that from
time to time no member of the Board of Directors will fully satisfy all
conditions of the definition of "audit committee financial expert" in SEC
Regulation S-K.
The Board of Directors, however, believes that John S. Ward has the
requisite financial management expertise required by the Audit Committee Charter
as a result of his experience as Chief Clerk of Cumberland County, Pennsylvania,
from which he is retired, and as President of Modern Transit Partnership. In
each of these positions Mr. Ward was and is ultimately responsible for
overseeing and assessing the performance of the County and the Partnership in
the preparation of its respective financial statements, providing him with an
understanding of and familiarily with generally accepted accounting principles
and internal controls over financial reporting. The Board of Directors,
however, has not determined that Mr. Ward is an "audit committee financial
expert" as defined in SEC Regulation S-K principally because his experience has
not presented to him the breadth and level of complexity of accounting issues
that are generally comparable to the breadth and complexity of issues raised by
the Company's financial statements.
The Audit Committee Charter provides that the Audit Committee is to meet at
least 4 times each year. The Audit Committee met 7 times during 2003.
Audit Committee Report
The Audit Committee has reviewed and discussed with management the
Company's audited financial statements for the year ended December 31, 2003.
The Audit Committee also has discussed with Smith Elliott Kearns & Company, LLC,
the matters required to be discussed by Statement on Auditing Standards No. 61
(Communications with Audit Committees), received from Smith Elliott Kearns &
Company, LLC, the written disclosures and letter required by Independence
Standards Board Standard No. 1 (Independence Discussions with Audit Committees)
and has discussed with Smith Elliott Kearns & Company, LLC, that firm's
independence. In that regard, the Audit Committee has considered whether the
provision by Smith Elliott Kearns & Company, LLC, of certain limited permissible
non-audit services in addition to its audit services is compatible with
maintaining that firm's independence and has determined that
it is. Based on the review and discussions referred to above, the Audit
Committee recommended to the Board of Directors that the audited financial
statements be included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2003 filed with the Securities and Exchange Commission.
Audit Committee:
Andrea Pugh, Chair
Anthony F. Ceddia
Denver L. Tuckey
John S. Ward
Compensation of Directors
Directors' Fees. During 2003, each director of the Company received
$600.00 for each meeting of the Company Board of Directors attended and $250.00
for each committee meeting attended. Each director of Orrstown Bank was paid an
annual retainer fee of $7,500.00 and a fee of $600.00 for each meeting attended.
Non-employee directors of the Bank also receive $250.00 for each committee
meeting attended. In addition, in 2003 the Chairman of the Board of the Bank
received an annual fee of $10,500, the Vice Chairman received an annual fee of
$8,500 and the Secretary received an annual fee of $7,500.
Deferred Compensation Plan. In 1995, the Company and Orrstown Bank
established a non-qualified deferred compensation plan for directors.
Participation in the plan is voluntary. Kenneth R. Shoemaker, President and
Chief Executive Officer of the Company and the Bank, and Stephen C. Oldt,
Executive Vice President and Chief Operating Officer of the Bank, also
participate in the Plan. Each participant may elect each year to defer all or a
portion of his or her directors' fees or, in the case of Messrs. Shoemaker and
Oldt, base salary. Those deferring compensation must begin withdrawals from the
plan by age 75. The amounts deferred are invested in a rabbi trust with the
trust department of Orrstown Bank as trustee. The participants direct the
investment of their own accounts and there is no guarantee as to investment
performance. Growth of each participant's account is a result of investment
performance and not as a result of an interest factor or interest formula
established by the participant.
In addition, Orrstown Bank has a separate deferred compensation arrangement
with seven of its directors or former members of its Board of Directors whereby
a director or his or her beneficiaries will receive a monthly benefit beginning
at age 65. The arrangement is funded by an amount of life insurance on each
participating director calculated to meet the Bank's obligations under the
compensation agreement. The cash value of future benefits to be paid, which are
included in other liabilities on the Company's consolidated balance sheet,
amounted to $122,029 at December 31, 2003. Annual expense of $12,325 was
charged to operations for 2003.
Directors Retirement Plan. In 1998 Orrstown Bank established a director's
retirement plan which provides participating directors a $12,000 per year
benefit (indexed for inflation by 4.00% per year until payments commence) for
the lesser of ten years or the number of years served. This
program encourages current directors to continue to serve as directors and
enables the Bank to reward its long-serving directors for their valuable
services.
Non-Employee Director Stock Option Plan of 2000. On January 27, 2000, the
Board of Directors of the Company approved the Orrstown Financial Services, Inc.
Non-Employee Director Stock Option Plan of 2000. The Directors' Option Plan is
a formula plan under which options to purchase shares of Company Common Stock
are granted each year to directors in office on April 1. The number of options
granted each year is based on the Company's return on average equity for the
most recent fiscal year. All options have a term of 10 years from the regular
grant date, are fully exercisable from the regular grant date and have an
exercise price equal to the "fair market value" of Company Common Stock as of
the date of the grant of the option. As long as shares of Company Common Stock
are traded over-the-counter and quotations for the shares appear on the NASD's
OTC Bulletin Board service, "fair market value" will mean the average of the
average of the daily high bid and low offer quotations for shares of Company
Common Stock reported through the OTC Bulletin Board service for the 10 trading
days immediately preceding the date of the grant of the option. If no bid or no
offer quotations are available during the 10 day pricing period, then "fair
market value" will mean the price of the last trade reported for the shares
through the OTC Bulletin Board service. If a director "retires," whether as a
result of reaching mandatory retirement age, or under any other circumstances
the Board of Directors, in its discretion, may determine to constitute
retirement, the options previously granted to the director will expire at their
scheduled expiration date. If a director's service as a director terminates for
any other reason, the options previously granted to the director will expire six
months after the date of termination of service unless scheduled to expire
sooner. In April 2003, each director, except Mr. Shoemaker, was granted an
option covering 566 shares of Company Common Stock at an exercise price of
$22.90 per share (both the number of shares and the exercise price have been
restated to reflect the 2 for 1 stock split paid February 10, 2004).
Report on Executive Compensation
The Company does not have a compensation committee and no compensation was
paid to executive officers of the Company by the Company in 2003. All
compensation was paid by the Bank.
The Executive Committee of the Bank, composed of three non-employee
Directors of the Bank and Kenneth R. Shoemaker, President and Chief Executive
Officer of the Company and the Bank, conducts a full review each year of the
Bank's executive compensation programs and is responsible for making
recommendations to the full Board of Directors. Mr. Shoemaker does not
participate in the Committee's evaluation of his performance for purposes of his
compensation. With respect to other executive officers, the Committee considers
the recommendations of Mr. Shoemaker before making final recommendations to the
Board of Directors.
The Bank's executive compensation program has four main components:
Base Salary. The Executive Committee determines base salaries for
executive officers based upon competitive pay practices of other banks of
similar size on a regional basis for similar positions and responsibilities.
The Executive Committee obtains comparisons of base salaries paid by other banks
from various sources, including L. R. Webber Associates, a Holidaysburg,
Pennsylvania consulting firm. Annually, the Executive Committee recommends
changes in base salaries of executive officers based on its evaluation of past
performance, job duties, scope and responsibilities and expected future
contributions. In determining the level of base salary, an individual's
personal performance in achieving previously established goals is the most
important factor.
Executive Incentive Plan. The Executive Committee also oversees the Bank's
Executive Incentive Plan established in 1998. The purpose of the Plan is to
support and promote the pursuit of the Bank's organizational objectives and
financial goals through the payment of annual cash bonuses to executive officers
and other key employees. Under the Plan, the percentage increase in earnings
for the year is given a 75% weighting and the percentage increase in funds
(deposits and short-term purchased funds) for the year is given a 25% weighting.
The resulting percentage factors are then added together, resulting in a bonus
percentage factor to be applied to an executive's salary to determine the amount
of his or her bonus. For example, a 10% increase in earnings and a 20% increase
in funds would result in a 12.5% bonus percentage factor (10% x .75 = 7.5%, 20%
x .25 = 5%; 7.5% + 5% = 12.5%). Assuming a base salary of $100,000, the amount
of the bonus would be $12,500. Under the Plan, the Bank will pay out 50% of the
bonus amount in the year to which the bonus relates, 25% in the next year and
25% in the second year. Thus, the amounts reported below in the Summary
Compensation Table as paid in 2003 pursuant to the Executive Incentive Plan
include 50% of the bonus amount earned in 2003, 25% of the bonus amount earned
in 2002 and 25% of the bonus amount earned in 2001. The bonus amounts as to
which payment is deferred to subsequent years are not vested and will be
forfeited by an employee whose employment with the Bank is terminated prior to
payment of the deferred amounts. In addition, in 2001, 2002 and 2003, the Board
of Directors determined, within its discretion under the Plan, to actually fund
bonuses under the Plan at the rate of 50% of the bonus amount calculated
pursuant to the principles described above. The Executive Committee and the
Board of Directors have complete discretion as to whom bonuses will be awarded
under the Plan and have the further discretion to award bonuses in excess of the
amounts calculated pursuant to the Plan.
Stock Options. On January 27, 2000, the Board of Directors of the Company
unanimously approved and adopted the Employee Stock Option Plan of 2000. The
Stock Option Plan was ratified by the shareholders at the 2000 Annual Meeting.
The purpose of the Stock Option Plan is to promote the long term success of the
Company and the creation of shareholder value by providing additional incentives
to those officers and key employees who are in a position to contribute to the
long term growth and profitability of the Company; assist the Company to
attract, retain and motivate key personnel with experience and ability; and link
employees receiving stock options directly to shareholder interests through
increased stock ownership.
The Executive Committee, on behalf of the Board of Directors, administers
the Stock Option Plan, and determines the number of shares to be covered by each
option, the term of the option, the period of time for options to vest after
grant, if any, and other terms and limitations applicable to the exercise of the
option. All options awarded under the Stock Option Plan are exercisable at an
option price equal to the "fair market value" of the Company's common stock at
the date of grant of the option. As long as shares of Company common stock are
traded over the
counter and quotations for the shares appear on the NASD's OTC Bulletin Board
service, "fair market value" shall mean the average of the daily high bid and
low offer quotations for shares of Company common stock reported through the OTC
Bulletin Board service for the 10 trading days immediately preceding the
relevant date. If no bid or no offer quotations are available during the 10 day
pricing period, then "fair market value" will mean the price of the last trade
reported for the shares through the OTC Bulletin Board service. Grants to
officers of the Company and other key employees are based on criteria
established by the Executive Committee including, past performance, job duties,
scope and responsibilities and contributions to overall Company performance.
Deferred Compensation and Supplemental Benefit Programs. The Bank has
established certain deferred compensation and supplemental benefit programs
described elsewhere in this proxy statement for certain of its executive
officers. The purposes of these programs are to provide to those executive
officers an economic incentive for long term service to the Company and the
Bank. The Executive Committee believes that these programs are competitive with
those offered by other banks of similar size on a regional basis.
Chief Executive Officer Compensation. Mr. Shoemaker's compensation for
2003 was established based upon the same factors and policies used to establish
compensation for executive officers generally.
Executive Committee:
Jeffrey W. Coy, Chairman
Kenneth R. Shoemaker
Denver L. Tuckey
Joel R. Zullinger
Company Performance
The following graph shows a five-year comparison of the cumulative total
return on Company Common Stock as compared to two other indexes: the S&P 500
Index and an index of banks with assets of under $500 million in assets. For
2001, 2002 and 2003, shareholder returns on Company Common Stock are based upon
trades reported by the National Association of Securities Dealers' Inc.'s OTC
Bulletin Board service. For prior years, shareholder returns on Company Common
Stock are based upon reports to the Company by shareholders that bought or sold
shares during the indicated periods. The Company is not aware of all prices at
which shares traded during such periods. The shareholder returns shown in the
graph are not necessarily indicative of future performance.
Period Ending
Index 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03
Orrstown Financial Services, Inc. 100.00 150.93 161.22 167.65 205.37 311.81
S&P 500 100.00 121.11 110.34 97.32 75.75 97.40
SNL <$500M Bank Index 100.00 92.57 89.30 123.53 158.20 230.92
The performance illustrated assumes that $100 was invested in Company Common
Stock and each index on December 31, 1998 and that all dividends were
reinvested.
Executive Compensation
Summary of Compensation. The following table shows cash and other
compensation paid or accrued during the last three fiscal years to the Company's
Chief Executive Officer and other executive officers who received total annual
salary and bonus exceeding $100,000 in 2003.
SUMMARY COMPENSATION TABLE
Annual Long-Term
Compensation(1) Compensation
Securities
Underlying All other
Name and principal Fiscal Salary Options Compensation
position Year (2) Bonus(3) (4) (5)
Kenneth R. 2003 $185,000 $30,000 8,400 $78,683
Shoemaker, 2002 175,000 8,400 68,526
President and Chief 2001 30,000 8,378 72,246
Executive Officer 160,000
25,000
Philip E. Fague, 2003 $120,000 $15,000 4,500 $26,880
Executive Vice 2002 110,000 4,724 23,344
President and Chief 2001 15,000 4,410 22,137
Sales and Service 97,500
Officer 15,000
Stephen C. Oldt, 2003 $120,000 $15,000 3,000 $50,987
Executive Vice 2002 2,624 44,518
President and Chief 2001 110,000 10,000 2,204 46,404
Operations Officer
100,000 15,000
Bradley S. Everly, 2003 $113,000 $ 3,000 $34,352
Senior Vice 2002 110,000 10,000 2,624 29,486
President and Chief 2001 110,000 2,204 33,874
Financial Officer 10,000
10,032
Jeffrey W. Embly, 2003 $93,000 $ 4,000 $16,275
Vice President and 2002 88,000 10,000 4,200 15,400
Senior Loan Officer 2001 80,000 4,410 14,000
10,000
10,000
-----------------------------------------------------------------------------
(1) None of the named executive officers received perquisites and other
personal benefits in excess of 10% of total annual salary and bonuses.
(2) Amounts shown include compensation earned and received as well as amounts
earned but deferred at the election of the executive officer.
(3) Includes bonuses earned in 2003 under the Executive Incentive Plan.
(4) Restated to reflect the 2 for 1 stock split paid February 10, 2004.
(5) Includes for 2003 for Messrs. Shoemaker, Fague, Oldt, Everly and Embly,
respectively, the following compensation amounts: (i) profit sharing
contributions, $27,822, $18,174, $18,000, $16,950 and $13,950; (ii)
matching contributions to the 401(k) plan; $5,288, $3,635, $3,600, $3,390
and $2,325; (iii) the present value of the economic benefit to the
executive from premiums paid by the Company to purchase split dollar life
insurance contracts under the Company's salary continuation plan for
Messrs. Shoemaker, Fague, Oldt and Everly, respectively, $44,447, $3,755,
$28,757 and $13,736; (iv) the amount of premiums paid by the Company for
death benefit in excess of $50,000 under the Company's group term life
replacement plan for Messrs. Shoemaker, Fague, Oldt and Everly,
respectively, $644, $153, $630 and $226; and (v) cash payments in lieu of
benefits under the Company's cafeteria plan not selected by Mr. Shoemaker,
$482, or by Mr. Fague, $1,163.
Option Grants in 2003. The following table shows all grants of stock
options to the executive officers named in the Summary Compensation Table under
the Company's Employee Stock Option Plan of 2000.
Individual Grants
------------------------------------------
% of total
No. of options
Securities granted to Exercise
Underlying employees Price Grant
Options in fiscal ($/share) Expiration Date
Name granted (1) year (1) Date Present
Value (2)
------------------------------------------------------------------------------
Kenneth R. Shoemaker 8,400 18.88% $27.26 6/26/13 $57,330
Philip E.Fague 4,500 10.11% $27.26 6/26/13 $30,713
Stephen C. Oldt 3,000 6.74% $27.26 6/26/13 $20,475
Bradley S. Everly 3,000 6.74% $27.26 6/26/13 $20,475
Jeffrey W. Embly 4,000 8.99% $27.26 6/26/13 $27,300
-----------------------------------------------------------------------------
(1) Restated to reflect the 2 for 1 stock split paid February 10, 2004.
(2) Based on the Black-Scholes model adapted for use in valuing executive stock
options. There is no assurance the value realized by an executive will be
at or near the value estimated by the Black-Scholes model. The actual
value, if any, an executive may realize will depend on the excess of the
stock price over the exercise price on the date the option is exercised.
In determining the Black-Scholes value, the following underlying
assumptions were used: (i) stock price volatility represents the standard
deviation in stock prices for Company Common Stock during the 12 month
period prior to grant of the option (20.84%); (ii) dividend yield
represents the cumulative dividends per share for the 12 month period prior
to grant of the option, divided by the average monthly price of Company
Common Stock over the same period (1.4%); (iii) the risk-free rate of
return represents the average monthly yield on US Treasury Notes maturing
within 9 to 10 years after the date of grant (3.4%); and, (iv) option term
represents the period from the date of grant of the option to the
expiration of the term of the option.
Aggregated Option Exercises in 2003 and Year-end Option Values. The
following table shows information for the executive officers named in the
Summary Compensation Table regarding exercises of options by them during 2003
and the number and value of unexercised options held by them at December 31,
2003. All information reported in the table and accompanying footnotes has been
restated to reflect the 2 for 1 stock split paid February 10, 2004.
Number of securities
underlying unexercised Value of unexercised in-the-
options at year end money options at year end($)(2)
Shares
Acquired Value
on Realized Exercisable Unexercisable Exercisable Unexercisable
Name exercise (1)
- - - - 33,998 - - $ 431,673 - -
Kenneth
R.
Shoemaker
- - 18,044 - - $ 227,671 - -
Philip E. - -
Fague
7,828 - - $ 85,420 - -
Stephen 2,204 $36,355
C.
Oldt
- - - - 12,238 - - $ 158,163 - -
Bradley
S.
Everly
- - - - 17,020 - - $ 217,972 - -
Jeffrey
W.
Embly
-----------------------------------------------------------------------------
(1) The "Value Realized" is equal to the difference between the option exercise
price ($17.01, restated to reflect the 2 for 1 stock split paid February
10, 2004) and the "fair market value" of Company's Common Stock on the date
of exercise, determined under the terms of the Company's Employee Stock
Option Plan of 2000 to be the price of the last trade reported through the
OTC Bulletin Board service ($33.50 per share, restated to reflect the 2 for
1 stock split paid February 10, 2004).
(2) Represents the difference between the option exercise price and the "fair
market value" of Company Common Stock on December 31, 2003, determined
under the terms of the Company's Employee Stock Option Plan of 2000 to be
the price of the last trade reported through the OTC Bulletin Board service
($33.50 per share, restated to reflect the 2 for 1 stock split paid
February 10, 2004).
Retirement Benefits. In 1988 Orrstown Bank established a profit sharing
plan covering all employees who have attained age 21, completed one year of
service and have worked for 1,000 hours or more during the plan year. Upon
becoming eligible to participate in the plan, an employee is fully vested.
Contributions to the plan are based on bank performance and are at the
discretion of the Bank's Board of Director's. Substantially all of the Bank's
employees are covered by the plan. The total amount allocated in 2003 to the
executive officers identified in the Summary Compensation Table was $94,896.
In 1992 the Bank established a 401(k) plan for its employees. The Bank
makes annual matching contributions of up to 50% of employee contributions to
the plan. The total amount allocated in 2003 to the executive officers
identified in the Summary Compensation Table was $18,238.
In 1998, the Bank's Board of Directors established salary continuation
plans for Kenneth R. Shoemaker, Bradley S. Everly, Stephen C. Oldt and Philip E.
Fague, in order to provide them with supplemental retirement income so that when
combined with Social Security and amounts available under the Bank's profit
sharing and 401(k) plan, they will be provided a total retirement income equal
in amount to 70% of final annual salary. In projecting the amount of an
employee's final annual salary, annual salary was assumed to increase at the
rate of 5% per year. Vesting in the benefits of the salary continuation plans
is determined within the discretion of the Board of Directors. As a result, an
intended purpose of the plans is to provide an incentive to such persons to
continue in the employ of the Bank.
In 1998, the Bank's Board of Directors also established an officer group
term replacement plan for the benefit of Messrs. Shoemaker, Everly, Oldt and
Fague. This plan provides participating officers with a benefit equal to two
times current salary with no cap. Under the plan the officer receives the same
coverage as he currently receives under the Bank's group term plan at less cost
to the Bank while the officer is employed. The officer receives continued
coverage after retirement for a small annual charge. The post-retirement
coverage will approximate two times annual salary (not to exceed the net
coverage purchased).
Change in Control Agreement. The Company and the Bank have entered into a
change in control agreement with Mr. Shoemaker. The agreement generally
provides that in the event of termination of Mr. Shoemaker's employment (other
than for cause) with the Company or the Bank under certain circumstances
following a "change in control" of the Company or the Bank, Mr. Shoemaker will
be entitled to receive continued payment of his annual cash compensation for
three years. If Mr. Shoemaker would obtain other employment at any time during
the three year period, his compensation from his new employer would be offset
against the amounts to be paid to him under the agreement. The agreement also
provides that the Company will continue to provide Mr. Shoemaker with available
insurance coverages in effect at the time of his termination pursuant to a
change in control for a period of three years, offset by coverage for any
subsequent employment, or until he reaches age 65. For purposes of the
agreement a "change in control" is defined to include an acquisition of 20% or
more of the outstanding voting securities of the Company; a merger or
consolidation of the Company or the Bank if, as a result of the transaction,
less than 50% of the voting securities of the surviving corporation are owned by
the former shareholders of the Company; a sale of substantially all the assets
of the Company; or the occurrence of any other event designated by a majority of
the non-employee directors to constitute a change in control for purposes of the
Agreement.
Transactions with Management
During 2003 some of the directors and executive officers of the Company and
the Bank, members of their immediate families and some of the companies with
which they are associated, had banking transactions in the ordinary course of
business with the Bank and may be expected to have similar transactions in the
future. These transactions were made on substantially the same terms,
including interest rates, collateral requirements and repayment terms,
as those prevailing at the time for comparable transactions with non-affiliated
persons and did not involve more than the normal risk of collectability or
present other unfavorable features.
During 2003, Snokes Excavating & Paving, Inc., of which Glenn W. Snoke, a
Director of the Company and the Bank, is President, performed certain paving and
excavating services in the ordinary course of business on behalf of the Bank,
directly, and pursuant to a subcontract with the Bank's general contractor in
connection with the construction of a new branch office of the Bank. The total
amounts paid to Snokes Excavating & Paving, Inc. for such services in 2003,
whether directly or indirectly through the Bank's general contractor, were
$67,456.
Independent Certified Public Accountants
The Board of Directors again has selected Smith Elliott Kearns & Company,
LLC, as the Company's independent certified public accountants for 2004.
Representatives of the firm are expected to be present at the Annual Meeting,
will have the opportunity to make a statement if they desire to do so, and are
expected to be available to respond to appropriate questions.
Audit Fees and Non-Audit Fees. Aggregate fees billed for professional
services rendered for the Company and the Bank by Smith Elliott Kearns &
Company, LLC, as of and for the fiscal years ended December 31, 2003 and 2002
are set forth below:
2003 2002
Audit Fees $23,175 $23,150
Audit Related Fees 540 0
Tax Fees 560 0
All Other Fees 0 0
TOTAL $24,275 $23,150
Audit Fees for 2003 and 2002 were for professional services rendered for
the audits of the consolidated financial statements of the Company, quarterly
review of the financial statements included in the Company's Quarterly Reports
on Form 10-Q, consents and other assistance required to complete the year end-
audit of the consolidated financial statements, and in the preparation of the
Company's Annual Report on Form 10-K.
Audit-Related Fees for 2003 were for advice in connection with the
reporting of stock options granted pursuant to the Company's Employee Stock
Option Plan of 2000 and the Non-Employee Director Stock Option Plan.
Tax Fees for 2003 were for assistance in the preparation of a petition for
a refund of Pennsylvania sales taxes.
All of services for which Audit-Related Fees and Tax Fees were paid in 2003
were approved by the Audit Committee pursuant to the de minimus exception
provided by Rule 2-01(c)(7)(i)(C) of SEC Regulation S-X
Smith Elliott Kearns & Company, LLC also performs certain administrative
and regulatory compliance related services on behalf of certain retirement plan
accounts for which the Bank acts as custodian. Discretion with respect to the
engagement of Smith Elliott Kearns & Company, LLC is vested in each plan
administrator and the fees paid to Smith Elliott Kearns & Company, LLC for such
services are expenses of and paid from the funds of each of the respective
retirement accounts. Such fees are not included among the fees reported above.
Shareholder Communications with the Board of Directors
The Company does not have a formal process by which shareholders may send
communications to the Board of Directors. As a matter of practice, shareholder
communications received by the Company are included under the topic
"Correspondence" with the Board meeting materials routinely furnished by
management to Directors in connection with meetings of the Board of Directors.
In addition, shareholder communications determined by the Chief Executive
Officer, in his discretion, to require immediate attention, also are promptly
furnished by him to the Chairman. When and as appropriate, the Company seeks to
provide a timely response to shareholder communications it receives.
ITEM 2 - APPROVE AMENDMENT TO ARTICLES OF INCORPORATION TO INCREASE THE NUMBER
OF AUTHORIZED SHARES OF COMMON STOCK FROM 10 MILLION SHARES TO 50 MILLION SHARES
The Company's Articles of Incorporation currently provide for 10 million
authorized shares of common stock with no par value and 500,000 shares of
preferred stock with a par value of $1.25 per share. As of March 1, 2004 there
were 5,097,249 shares of common stock outstanding, after giving effect to the 2
for 1 stock split declared January 2, 2004 and paid to shareholders on February
10, 2004. In addition, the Company has reserved shares of common stock for
issuance pursuant to its dividend reinvestment plan, employee stock option plan,
non-employee director stock option plan and employee stock purchase plan.
Currently no preferred shares have been issued or are outstanding.
Proposed Amendment
The proposed amendment would increase the number of authorized shares of
common stock from 10 million shares to 50 million shares. The full text of the
amendment is as follows:
"Section 6(a)(i) of the Articles of Incorporation of the Corporation
is hereby amended to read in its entirety as follows:
'(i) 50,000,000 shares of common stock with no par value.'"
All other provisions of the Articles of Incorporation will remain unaffected and
in full force and effect. No change is being proposed with respect to preferred
shares.
All shares of common stock, including those currently authorized and those
which would be authorized by the proposed amendment, are equal in rank and have
the same voting, dividend and liquidation rights. There are no preemptive
rights associated with the Company's common stock.
Reasons for the Proposed Increase in Common Shares
The Board of Directors believes that the proposed increase in the number of
authorized shares of common stock is desirable so that a sufficient number of
shares of common stock will be available for issuance from time to time without
further action or authorization by the shareholders. The additional authorized
shares of common stock may be used as consideration in acquisitions, in
connection with equity financing, stock splits, dividends, employee and non-
employee director benefit plans, dividend reinvestment plans and other corporate
purposes determined by the Board of Directors to be in the best interests of the
Company.
The Board of Directors has no present plans, arrangements, or undertakings
for the issuance of the additional shares of common stock and the Company does
not now have any written agreements, understandings or arrangements with respect
to any material acquisitions for which the additional shares of common stock
would be needed. The recent 2 for 1 stock split, however, demonstrates the need
to provide for additional shares of common stock. With 5,074,021 shares of
common stock now outstanding, the Company could not again split its shares on a
2 for 1 basis without providing for additional shares. The Board of Directors
has determined that it would be appropriate now to increase the number of
authorized shares to 50 million, rather than to some lesser number, in order to
provide for a sufficient number of shares that would accommodate up to three
additional 2 for 1 stock splits, plus an additional number of shares that might
be issued for other appropriate purposes, without having to again amend the
Articles of Incorporation.
The authorization of the additional shares will not, by itself, have any
effect on the rights of the Company's shareholders. The issuance of additional
shares for corporate purposes other than a stock dividend or stock split could
have, among other things, a dilutive effect on earnings per share and on the
equity percentage and voting power of shareholders at the time of issuance. In
addition, the increase in the number of authorized shares could render more
difficult under certain circumstances or discourage an attempt to obtain control
of the Company, whether through a tender offer or otherwise, by, for example,
the issuance of such shares in order to dilute the share ownership of the person
attempting to obtain control. This proposal, however, is not being made in
response to any effort of which the Company is aware to accumulate shares or
obtain control of the Company.
Effective Date
If the proposed amendment is approved by the shareholders, it will become
effective on the date upon which the necessary filings are made with the
Pennsylvania Secretary of State. Such filings will be made as soon as
practicable following shareholder approval.
Vote Required
The affirmative vote of a majority of the votes cast is required to approve
the proposed amendment.
Board Recommendation
The Board of Directors recommends a vote FOR approval of the amendment to
the Articles of Incorporation to increase the number of authorized shares of
common stock from 10 million to 50 million.
APPENDIX A
Revised: August 28, 2003
ORRSTOWN FINANCIAL SERVICES, INC.
AUDIT COMMITTEE CHARTER
The Board of Directors shall elect the Audit Committee at the annual
reorganization meeting of Orrstown Financial Services, Inc. (the Corporation).
In accordance with the by-laws of the Corporation, the Audit Committee is
established as a subcommittee reporting periodically to the Board of Directors.
The Audit Committee shall be composed of no less than three directors who are
independent of management of the Corporation as outlined by the Securities and
Exchange Commission (SEC) and NASDAQ and are free of any relationship that, in
the opinion of the Board, would interfere with their exercise of judgment as a
committee member. At least one member of the audit committee must have
accounting or related financial management expertise as the Board interprets
such qualifications in its business judgment.
The Audit Committee shall provide assistance to the Board in fulfilling their
responsibilities to the shareholders. Principally, these responsibilities
entail assessing the effectiveness of the internal control system over financial
reporting, reviewing adherence to policies / procedures and assuring the
safeguarding of all corporate assets. In so doing, it is the responsibility of
the Audit Committee to maintain open lines of communications between the Board
of Directors, external auditors, internal auditors, and the senior management of
the Corporation. Both the internal auditors and external auditors are
authorized to communicate directly with the committee if necessary.
In carrying out these responsibilities, the Audit Committee will:
1. Retain the final authority for the appointment, compensation, retention and
oversight of the external auditor including approval of all audit
engagement fees and related terms. Pre-approve all audit, review or
attest services and any permitted non-audit services performed by the
external auditor.
2. Meet with the external auditors and financial management of the Corporation
to review the scope of the annual audit for the current year and at the
conclusion thereof, review such audit findings. This review will include
both the external auditor's recommendations and the related management
response.
3. Review with the external auditors and corporate management the adequacy and
effectiveness of the internal financial and accounting controls of the
Corporation and elicit any recommendations that they may have for the
improvement of such control procedures. Particular attention should be
given to the adequacy of such controls to expose any payments,
transactions or other procedures, which might be deemed illegal or
otherwise improper. Further, the Audit Committee should periodically
review corporate policy statements in terms of their adequately
representing the Corporation's Code of Conduct and Business Ethics Policy
and the Corporation's Financial Code of Ethics.
4. Review and disclose the required information in the annual proxy statement
as outlined by the SEC.
5. Review and recommend to the Board the appointment of a competent
outsourcing vendor for internal audit services and/or in-house staff.
If an outsourcing vendor is utilized, the Audit Committee will utilize
the guidance from the Interagency Policy Statement on the Internal Audit
Function and its Outsourcing in the selection and oversight of the
outsourced activities.
6. Review and approve the Internal Audit Department's proposed audit schedule
for the coming year and the coordination of such programs with the external
auditors' year-end requirements. Particular attention should be given to
maintaining the best effective balance between external and internal
auditing resources.
7. Monitor the activities of the Internal Audit Department and ensure that the
Internal Audit Department adequately discharges responsibilities for the
examination, review, and reporting to the Audit Committee that:
a) Internal accounting and financial controls of the various areas are
adequate and efficient and can be relied upon to produce accurate
financial information.
b) Internal controls adequately safeguard the assets of the Corporation.
c) Financial records of the operational areas are complete and accurate
and are in conformity with corporate policy, generally accepted
accounting principles, and requirements of the various regulatory
bodies.
d) Operational areas are in compliance with FDIC, FRB, and all other
Federal and State laws and regulations.
e) Control over the development, maintenance, and operation of EDP
systems are sufficient to ensure the accuracy, security, and
completeness of data processing results.
8. Prior to each periodic meeting, the Audit Committee will be provided a
report prepared by Internal Audit, which outlines the findings of all audit
engagements completed during the period.
9. Review all reports on examinations made by the various regulatory agencies
and evaluate management's responses to them.
10.Establish "Whistleblower" procedures concerning accounting, internal
control and/or auditing matters.
11.Review financial statement filings with the SEC prior to their submission
including the 10-K Annual Report and 10-Q Quarterly Reports.
12.Submit minutes of Audit Committee meetings to the Board of Directors at the
next regular Board meeting.
The foregoing list of functions is not intended to limit the Committee in
fulfilling its responsibilities, but rather is intended to provide an overview
of the principal duties to be performed by the Committee.
In performance of its duties, the Committee shall meet at least four times per
year and have full use of the Corporation's internal audit resources and engage,
if necessary, at the Corporation's expense, independent counsel and/or other
advisors as necessary, to advise the Committee in discharging its duties.
[ ORRSTOWN FINANCIAL SERVICES, INC. LOGO ]
This Proxy is solicited on behalf of the Board of Directors.
The undersigned hereby appoints Patricia A. Corwell and Robert B. Russell, or
either of them, each with full power of substitution as attorneys and proxies of
the undersigned to vote all Orrstown Financial Services, Inc. Common Stock of
the undersigned at the Annual Meeting of Shareholders of the Company to be held
on Tuesday, May 4, 2004, at 9:00 A.M., in the King Street Conference Room of the
Orrstown Bank Administrative Center located at 77 East King Street,
Shippensburg, Pennsylvania, and at any adjournment of such meeting, as fully and
effectually as the undersigned could do if personally present, and hereby
revokes all previous proxies for said meeting.
Where a vote is not specified, the proxies will vote shares represented by this
Proxy FOR the election of all three nominees for director to Class B and FOR
Proxy Item 2 and will vote in accordance with the directions of Company
management on such other matters that may properly come before the meeting.
Please mark your votes as indicated in this example [X]
Proxy Item 1 - Election of three directors to Class B to serve for a three (3)
year term. Nominees: Gregory A. Rosenberry, Glenn W. Snoke and Denver L.
Tuckey.
FOR all nominees listed herein WITHHOLD AUTHORITY
(except as withheld) in space to vote for all nominees listed
provided herein
[ ] [ ]
(Instructions: To withhold authority to vote for any individual nominee, write
that nominee's name in the space provided below.)
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Proxy Item 2 - Approval of an amendment to the Company's Articles of
Incorporation to increase the number of authorized shares of common stock from
10 million shares to 50 million shares.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Please date and sign exactly as name appears hereon. When signing as attorney,
executor, administrator, trustee, guardian, etc., full title as such should be
shown. For joint accounts, each joint owner should sign. If more than one
trustee is listed, all trustees should sign, unless one trustee has power to
sign for all.
(Signature of Shareholder)
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(Signature of Shareholder)
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Dated: , 2004
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